* More than 5,000 civilians flee

* U.S. opposes IMF loan; IMF sees solution soon

* Red Cross temporarily halts war zone operations

* Government predicts 48 hours to free civilians

* France and UK say army broke agreement and used airpower

(Adds statement by British and French foreign ministers)

By C. Bryson Hull

COLOMBO, May 15 (Reuters) - Sri Lankan troops advanced on the Tamil Tigers on Friday and 5,000 civilians fled the shrinking war zone, signalling a military finish to Asia's longest modern war despite Western calls for a negotiated end.

With an end to Sri Lanka's 25-year separatist conflict in sight, the U.N. rights chief backed calls for an independent inquiry into possible war crimes and violations by both sides.

The stakes could not be higher for either side. The Tigers face destruction by overwhelming firepower and force, and Sri Lanka wants to ensure the rebels do not escape from the jaws of defeat, as they have earlier in a war that began in 1983.

The International Committee of the Red Cross (ICRC) said fighting forced it to temporarily halt evacuations and aid to those trapped on the Indian Ocean island's northeast coast.

"Our staff are witnessing an unimaginable humanitarian catastrophe," ICRC operations director Pierre Krahenbuhl said in a statement. "No humanitarian organisation can help them in the current circumstances. People are left to their own devices."

The military said 5,000 people escaped on Friday from the 2.5 square km (1 sq mile) held by the Liberation Tigers of Tamil Eelam (LTTE) after 3,765 fled on Thursday across a lagoon under rebel fire, some of them floating in inflated tyre tubes.

"Troops are coming along the coastal line, and closing in," military spokesman Brigadier Udaya Nanayakkara said. "We want to rescue the civilians in 48 hours."

Pro-rebel website www.TamilNet.com reported on Friday that "close-quarter fighting was on", quoting an unidentified rescue worker who said most civilians were hiding in bunkers.

Later, it reported that a volunteer doctor appointed by the LTTE had seen at least 800 dead bodies.

DESPERATE END

Signs the LTTE was desperate grew.

"We have heard that the LTTE is making its last calls to the diaspora, saying they expect to be killed," a diplomat in Colombo told Reuters on condition of anonymity.

The wife and children of Soosai, the nom de guerre of the Tigers' naval wing chief, were captured trying to escape in a boat carrying about $5,000 in cash, the navy said.

The two sides traded accusations over the use of banned weapons like cluster bombs and white phosphorus, with the military warning the LTTE could use the latter to slaughter civilians en masse and blame the government.

Independent confirmation of events is nearly impossible, since most outsiders are barred from the area and both sides have repeatedly distorted accounts to their advantage.

The government brushed off calls on Wednesday from the U.N. Security Council and U.S. President Barack Obama to slow its offensive, while the Tigers refused to surrender and free tens of thousands of people they are holding.

President Mahinda Rajapaksa is banking on victory to win a new term and rejuvenate a $40 billion economy beset by a declining currency, low foreign exchange reserves and shrinking revenue for tea and garment exports.

Sri Lanka in March sought a $1.9 billion International Monetary Fund (IMF) loan to weather the storm, which the United States again said should be used as leverage to get the government to slow the war and protect civilians.

On Friday, IMF director Dominique Strauss-Kahn said Sri Lanka "obviously needs the help of the IMF so we are trying to find a solution to the problem in the next few weeks".

RIGHTS PROBES

U.N. Secretary-General Ban Ki-moon's chief of staff, Vijay Nambiar, was due in Sri Lanka on Saturday to discuss the humanitarian situation, U.N. spokesman Gordon Weiss said.

Reports that hundreds were killed in attacks on a clinic in LTTE territory, for which both sides blamed the other, spurred Obama and the Security Council to make their first formal statements on Sri Lanka since the war intensified this year.

Britain has called for a rights inquiry, and the European Union is due to consider a statement backing the same.

The foreign ministers of Britain and France said they were concerned by reports of air strikes at the weekend. The use of air power is a "very clear contravention" of government commitments, the pair said.

"We urge you again to stop the use of such weapons," they said. "It is in your hands to choose whether you wish to transform a probable military victory into a long-term political success, widely supported by the international community."

U.N. rights chief Navi Pillay on Friday said she supported an inquiry. Pillay, who is an ethnic Tamil from South Africa, two months ago warned both sides they may have committed war crimes or crimes against humanity.

Sri Lanka's government called the accusations a "cynical game of political shadow-boxing" to save the LTTE from defeat.

The Tigers, on U.S., EU, Canadian and Indian terrorist lists, have vowed no surrender in their fight for a separate nation for Sri Lanka's minority Tamils, which began in the 1970s and erupted into full-scale civil war in 1983.

Tamils complain of marginalisation by successive governments led by the Sinhalese majority, which has run every government since independence from Britain in 1948. (Additional reporting by Ranga Sirilal, David Brunnstrom in Brussels, Jonathan Lynn in Geneva and the London bureau; Editing by Alex Richardson)

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